By Angel Gurría, OECD Secretary-General,
Ladies and Gentlemen,
It is a great pleasure to welcome you to our first edition of OECD Parliamentary Days. Like never before the work of parliaments has become crucial for building stronger, cleaner and better societies. The crisis has given us a great opportunity to improve our policies, our institutions and our frameworks through inclusive and effective structural reforms. Whether we can achieve this goal greatly depends on the skills and vision of our parliamentarians.
Tonight’s dinner will trigger a rich discussion on relevant and sensitive issues that impact all citizens – like taxes, trade and financial regulation. Tomorrow in your High-level Parliamentary Seminar you will dive deeply into the OECD’s comparative analysis, technical research and policy recommendations. You will also have the chance to meet with our experts and delegations. These dialogues are mutually beneficial – they help us better understand our citizens’ needs and ensure that our data, analysis, and policy recommendations reach you.
Let me kick off our discussions with a quick scan of our Global economic outlook.
The current economic outlook: cautious optimism.
It is the case that the fear of catastrophe has receded. We might even consider that what we call in our economist jargon “tail risks” have subsided and that “upside risks” may be getting stronger. In other words, the situation might end up better than expected. But we should remain cautiously optimistic. We are not out of the woods yet. The recovery is proving sluggish. This is not surprising. Balance sheets have been seriously unsettled, notably in the financial and household sectors, and across major advanced economies. And the healing takes time.
Such “healing” is most advanced in the United States. The US economy has been growing moderately. Growth is projected at close to 2% in 2013, with unemployment still high. Uncertainty about ongoing budgetary negotiations in the U.S. represents the biggest residual risk. However, unemployment has been trending down from earlier heights. In addition, we can see incipient buoyancy in the housing market.
But the news is not so good in Europe. These economies have slipped back in recession and are unlikely to rebound briskly in the near term. Lending and investment activity remain very weak. There is some hope in Europe though, as a modest recovery may take hold. The fall in yields since the summer, via “positive contagion”, is welcome. A return of private capital to the periphery could help support demand and the financial system, as well as improve public debt dynamics. So far, however, clear evidence of a bottoming out is lacking. The improvement in sentiment remains fragile and political uncertainty remains significant in a number of countries. Important decisions will be needed in the next few months on the proposed banking union.
Meanwhile, the outlook for Japan looks worrisome, as fiscal consolidation needs are very challenging. It is not yet clear if the recently announced fiscal stimulus package, combined with the emphasis on monetary easing, will help to instill confidence that policy will be more growth-oriented. But the recent changes in monetary policy raise the chance of a durable exit from deflation. This is very welcome, even if its effects on the yen raise concern among Japan’s partners.
The key to recovery everywhere is to push ahead with reforms that will pave the way for stronger growth over the longer term. That is why the issues addressed in tomorrow’s High-level Parliamentary Seminar - tax, trade and banks - are so topical.
We must refresh our perspective on taxes.
The crisis has focused our attention on taxation. Many governments across the world are faced with high levels of debt and large budget deficits, and are thus in pressing need of revenues. Taxation is the mechanism for collecting revenues from citizens and business. But these mechanisms must be fair and transparent. Governments are asking populations to make sacrifices. This is politically acceptable only if citizens are reassured that everybody pays their fair share, and that strong shoulders - like large businesses and multinational companies - contribute.
The existing tax rules were designed to ensure that multinational companies do not pay taxes twice on the same earnings. But the system has now become inadequate. Today questions arise about taxes not being paid anywhere, as many multinationals exploit legal loopholes to shift profits to low tax jurisdictions. They see this as fulfilling their responsibility to maximise shareholder profits. But this leads to a substantial erosion of corporate tax revenue for governments.
We thus need to re-examine international taxation rules to close these loopholes. We need to provide countries with analysis, best practices, recommendations and international instruments to better address 21st century business practices.
This is the aim of a new OECD project called “BEPS” for “Base Erosion and Profit Shifting”. The G20 has also asked the OECD to help it address this issue at the international level. You will hear about our most recent analysis tomorrow, before the report’s media launch. This work, together with the OECD’s and the G20’s efforts to tackle offshore tax evasion, through increased international cooperation and transparency, will create a fairer tax system and increase revenues.
On trade, it’s time to rewrite the rules of the game.
Trade is another area where the rules have changed significantly with globalization. Conventional measures of trade no longer reflect the increasingly complex supply chains of today’s world. With the rise of Global Value Chains, it is increasingly less relevant to talk about gross trade flows. In most cases, they do not reflect the significant value created in other countries, resulting in a misleading picture of a country’s competitiveness.
Goods and services are now from “everywhere” rather than from “somewhere”. Here’s an example: China’s bilateral trade surplus with the United States shrinks by 25% on a value-added basis, reflecting the high level of foreign-sourced content in Chinese exports.
This growing fragmentation of production not only challenges conventional wisdom on measuring trade; it also challenges the policies we develop around trade. Our new work on Global Value Chains and Trade in Value-Added shows that the mercantilist approach needs to be revisited as the cost of protectionist policies becomes higher. Existing instruments such as import tariffs, rules of origin and anti-dumping, directly hurt the competitiveness of domestic industries.
This new work also has implications far beyond trade policy, impacting areas such as innovation, investment, industrial policy, skills formation, risk management and development assistance. On the road to recovery, it is crucial to gain ground in higher value-added activities and market segments.
In this context, knowledge-based capital, such as software, R&D, branding and intellectual property are increasingly important. They allow upgrading in global value chains, creating growth and employment.
And we must strengthen banking reforms.
Lastly, let’s talk about financial regulation and supervision, a very familiar subject. It has been one of the hottest issues on the table since the financial crisis began. And it remains “unfinished business”.
The OECD has maintained from the outset that the main driver of bank defaults has been excess leverage and business models that combine highly-levered derivatives and structured products. These have resulted in collateral and margin calls which are too large relative to bank capital. To prevent this, for several years now we have been recommending separating retail and investment banking, and a host of other measures to discourage excessive risk-taking.
Economic optimism is no excuse to stall the financial reform agenda. In this context, we are keeping a close eye on developments in Europe, where we expect legislation proposals from Internal Market and Services Commissioner Barnier before September.
Ladies and Gentlemen:
If we join forces we can bring about great changes. The association between the OECD and the parliamentarians of its Member and partner countries is one of the most effective catalysts for social progress in today’s world. When parliamentary debates are enriched with OECD evidence-based analysis, comparative statistics and best practices, their possibilities of forging consensus grows significantly. When the OECD takes your views into consideration, its work and recommendations reflect better the needs and dreams of the people.
Let’s keep strengthening this partnership. Let’s make the most of this event. Let’s help each other, and our respective governments, to design and implement better policies for better lives.
Have a productive and interesting exchange. Thank you!